Assignment:
The Nutrex Corporation wants to calculate its weighted average cost of capital. It's target capital structure weights are 40% long-term debt and 60% common equity. The before-tax cost of debt is estimated to be 10% and the company is in the 40% tax bracket. The current risk-free interest rate is 8% on Treasury bills. The expected return on the market is 13% and the firm's stock beta is 1.8.
a. What is Nutrex's cost of debt?
b. Estimate Nutrex's expected return on common equity using the security market line.
c. Calculate the after-tax weighted average cost of capital.